Global iron ore prices bottoming out
NMDC’s stock has been under pressure amid falling iron ore prices along with lower volumes during Apr-Aug‘24 due to labour strikes, heavy monsoons and a few logistics constraints. We believe global iron ore prices have bottomed out at ~USD90/t and reckon they shall recover and average USD105–110/t in FY25E/26E.
The probability of any major decline in NMDC’s prices is very low as demand is set to improve. Besides a recovery in global iron ore prices, we forecast NMDC’s iron ore volume shall recover in H2FY25 with a seasonally good second half along with absence of workers’ strike, which hurt volumes in Q1FY25. Reiterate ‘BUY’ with an unchanged TP of INR286, valuing the stock at 10x FY26E PE.
Iron ore prices bottoming across the globe; expect short-term rally
We reckon global iron ore prices have bottomed out at ~USD90/t (CMP: USD93/t) and shall tend to move higher and cross USD100/t soon amid likely restocking demand before Golden week in China (October 1-7, 2024). Approximately 130– 140mt of supply (~5% of global production and ~10% of seaborne trade) has a CFR cost > USD90/t while another 30–40mt is sitting at USD80–90/t cost; hence this shall lead to production cuts if prices fall below USD90/t. As we do not anticipate major steel production cuts globally, the above supply is necessary to meet the demand.
NMDC’s price discount to imports narrows; price may sustain
NMDC has maintained and not revised its prices for September deliveries yet (the market has been awaiting a correction). We note that it has cut prices by INR1,000/t during July and August. Our calculation indicates that NMDC’s prices are trading at ~21% discount to landed cost of imports (same as it was in Jun-24). As demand for iron ore is still firm in India, NMDC is in no rush to cut prices. With an improvement in seasonality demand from October, NMDC may not cut prices or even if it cuts, it could be in the range of INR200–300/t only.
Hurt by monsoons, volume recovery to begin from Oct-24
During Apr-Aug’24, NMDC’s iron ore sales volumes were down 7.5% YoY to 16.3mt, which was due to a labour strike as well as logistics constraints at Karnataka as well as Chhattisgarh mines. We expect ease of logistics constraints in H2FY25 and thus volume growth of ~13% in the rest of the months to reach 47mt (up 6% YoY). We factor in 8% volume CAGR over FY24–26 to 51.3mt at EBITDA/t of INR1,927 (at the CMP of iron ore, NMDC must be making INR1,800–1,900/t EBITDA).
Inexpensive valuations; reiterate ‘BUY’
The stock has corrected ~10% in the last one month. At the CMP of INR215, the stock is trading at 7.6x FY26E PE and 4.5x FY26E EV/EBITDA; reiterate ‘BUY’ with an unchanged TP of INR286, valuing it at 10x FY26E P/E.
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